MetaMask Staking Faces SEC Scrutiny Over Lido and Rocket Pool Offerings

10 Jul 2024

SEC v. Consensys Software Inc. Court Filing, retrieved on June 28, 2024, is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This part is 20 of 26.

C. Consensys—through MetaMask Staking—Offers and Sells the Lido and Rocket Pool Investment Contracts.

i. Through MetaMask Staking, Consensys Promotes, Offers, and Sells the Lido and Rocket Pool Investment Contracts To Its Users.

286. On January 13, 2023, Consensys publicly announced the release of a program called MetaMask Staking.

287. Consensys created MetaMask Staking to offer and sell the Lido and Rocket Pool staking program investment contracts to investors.

288. The January 13 announcement stated: “MetaMask Staking allows you to engage in liquid staking with two prominent providers, Lido and Rocket Pool, where by you can deposit your ETH and receive a token representing the value of your stake in return.”

289. It called MetaMask Staking “an easy and convenient way to stake ETH.”

290. On January 13, 2023, Consensys posted on the MetaMask Twitter account: “We are extremely happy to announce that you can now stake ETH with Lido or Rocket Pool through the [MetaMask] Portfolio Dapp.” This post included an image advertising “5.22% rewards” with Lido and “4.59% rewards” with Rocket Pool—highlighting the former as the “Highest rewards.”

291. On May 16, 2023, Consensys posted on the MetaMask Twitter account: “[U]sers can now stake and withdraw ETH directly from our liquid staking providers, Rocket Pool and Lido.” And “Get started here,” pointing to a link to the MetaMask portfolio website.

292. In promotional materials, Consensys claimed that MetaMask Staking would make it easier for individual holders of ETH to participate in staking.

293. Specifically, in its January 13, 2023, announcement on its website, Consensys stated: “[S]taking can be a convoluted and complicated process for end-users. MetaMask Staking will offer an easy-to-understand and trusted entry point for users interested in staking. Through this new feature, users can compare the rewards rate, network control, and popularity of different liquid staking providers and choose the one they want to stake with.”

ii. Consensys’s MetaMask Staking User Interface.

294. To use MetaMask Staking, investors must have ETH in their MetaMask Wallet.

295. First, from the browser extension or mobile app, the investor clicks on “Stake,” or “Staking.” They are then taken to the MetaMask Portfolio site, where they can then choose “ETH.”

296. At this point, Consensys’s graphical interface presents the investor with two options: Lido and Rocket Pool.

298. If either Lido or Rocket Pool is at or near capacity, Consensys’s MetaMask Staking software disables the ability to stake with that program.

299. In any event, an investor can choose either the Lido or Rocket Pool staking program by clicking “Stake.”

300. On the following screen, an investor can input the number of ETH that they would like to invest in one of the staking program investment contracts and click “review.”

301. At that point, Consensys’s MetaMask Staking software shows the investor a screen with the number of the staking pool tokens they will receive in return, their “estimated rewards,” and the “estimated gas fee.”

302. If the investor wishes to proceed with their request to invest in the staking program investment contract, the investor clicks “confirm.”

303. If MetaMask Staking successfully completes the transaction, the investor will see a screen that says, “Transaction Complete.”

iii. Consensys Offers and Sells the Lido and Rocket Pool Investment Contracts To Investors.

304. Accordingly, Consensys offers and sells the Lido and Rocket Pool investment contracts to investors through the MetaMask Staking platform.

305. Consensys makes this process appear simple and easy to non-technical investors, while performing the technical series of actions necessary to transfer the investor’s ETH to Lido or Rocket Pool and transfer stETH or rETH to the investor in return.

306. When the investor clicks “confirm,” this signals the MetaMask Staking software to take the steps necessary to exchange the investor’s ETH for rETH or stETH. Specifically, Consensys has programed MetaMask Staking software to take the steps described below.

307. First, Consensys’s MetaMask Staking software reads the private key associated with the ETH in the investor’s MetaMask Wallet.

308. Second, using this key, the software creates a blockchain transaction and transfers the investor’s ETH from the investor’s MetaMask Wallet into a smart contract called the MetaMask Staking Aggregator Router Smart Contract (the “MM Staking Router Smart Contract”).

309. The MM Staking Router Smart Contract has its own Ethereum blockchain address.

310. The investor has no control over the MM Staking Router Smart Contract.

311. The MM Staking Router Smart Contract address temporarily holds the investor’s ETH.

312. Although Consensys has programmed its MetaMask Staking software so that Consensys can take a fee for each transaction, Consensys currently sets the fee variable at zero (i.e., it does not take a fee at this time).

313. Consensys could, however, change the software at any time to assess a fee, in which case the amount of the fee would be diverted from the MM Staking Router Smart Contract into a blockchain address designated by Consensys.

314. Third, Consensys’s software transfers the investor’s ETH from the MM Staking Router Smart Contract to the Lido or Rocket Pool Proxy smart contract (deployed by Lido and Rocket Pool, respectively).

315. These Proxy smart contracts mint stETH or rETH, respectively, upon receiving a deposit of ETH, and, if the MM Staking Router Smart Contract sends ETH to the Proxy smart contracts, the Proxy smart contracts will transfer newly minted stETH or rETH, respectively, to the MM Staking Router Smart Contract.

316. Fourth, the MM Staking Router Smart Contract transfers the stETH or rETH, as the case may be, to the investor’s MetaMask Wallet.

317. As of March 11, 2024, investors had invested 100,252 ETH in the Lido staking program through MetaMask Staking and 8,375 ETH in the Rocket Pool staking program through MetaMask Staking.

318. As of March 11, 2024, Consensys, through MetaMask Staking, offered and sold the Lido staking program to 32,449 unique blockchain addresses and offered and sold the Rocket Pool staking programs to 2,215 unique blockchain addresses.

319. For its part, Lido embraced MetaMask Staking as a platform through which its staking program would be offered and sold.

320. On January 17, 2023, Lido announced on its blog that “Ethereum staking with Lido is now live on MetaMask! Stake your ETH on MetaMask to earn yield and secure the Ethereum network from the comfort of your wallet.”

321. Moreover, a former Lido employee testified that “in terms of a distribution channel [Consensys’s MetaMask was] a very highly valued target.”

322. Accordingly, by the conduct described above, Consensys offered and sold, and continues to offer and sell, investment contracts for Lido and Rocket Pool, participating directly in the distribution of securities from the issuers—Lido and Rocket Pool—to the investor.

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This court case retrieved on June 28, 2024, is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.